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3 ETFs for Manufacturing "Renaissance"

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US manufacturing activity has been quite upbeat of late, as manufacturers have been expanding production and adding jobs in response to the increased demand. The sector has grown much faster than the broader economy in the last 3-4 years.

U.S. Manufacturing Renaissance: Myth or Reality?

Many believe that the country is on the verge of a manufacturing renaissance, thanks mainly to lower energy prices, improving technology and rising labor costs in developing economies. (Read: 3 Aerospace & Defense ETFs defying gravity)

Critics on the other hand point out that the manufacturing output in the country is still much lower than the beginning of the recession.

According to the IMF “Besides lower domestic energy prices, other supporting factors such as a weaker exchange rate, volatile shipping costs, and increases in emerging markets’ labor costs could support steady increases in manufacturing output and employment, beyond those that could be attributed to just a cyclical rebound.”

Further, the following chart (manufacturing employment in millions) presented by the National Economic Council Director Gene Sperling in his speech on US manufacturing last week at Brookings suggests that the sector’s recent performance is exceeding the range of normal cyclical rebound.

Recent Manufacturing data shows a positive trend

While there may be disagreements as to whether the rebound in manufacturing seen since 2010 is just a cyclical recovery or a structural turnaround, there is no doubt that the recent data suggests strong uptrend.

ISM's monthly manufacturing index rose to 55.4 in July from 50.9 in June—its biggest one-month increase since 1996. According to the report, production activity surged to its highest level in nine years.

Markit's PMI for the month of July increased to 53.7 in July from 51.9 in June, signaling the strongest manufacturing expansion since March this year. Manufacturers ramped up their production levels with all three groups (consumer, capital and intermediate goods) posting an increase in production during the month, in response to increased new business.

The manufacturing sector which had lagged behind the broader market earlier this year is now benefitting from the housing market recovery, which has resulted in increased demand for furniture, appliances and wood products. (Read: The Best ETFs in Market's top sector)

Rising consumer confidence and healing labor market have boosted the demand for manufactured products. These factors in turn have been able to offset the headwinds generated by slowing global economic activity and effects of the sequester.

Launched in December 1998, XLI is the largest and most popular ETF in the space with more than $6.1 billion in AUM and an average daily volume of more than five million shares. The product currently holds 63 stocks in its basket.

In terms of sector exposure, Aerospace & Defense (26%), Industrial conglomerates (19%) and Machinery (19%) take the top three slots.

GE is the top holding of the fund--accounting for about 12% of assets, while United Technologies (UTX) and Union Pacific (UNP) round out the top three.

IYJ which tracks the Dow Jones U.S. Industrials Index, made its debut in June 2000. It has so far amassed $1.2 billion in assets, which are invested in 223 securities.

GE is the top holding in the fund with 11.1% of assets, followed by United Technologies and Union Pacific. From the sector perspective, General Industrials (21.6%) occupy the largest weight, followed by Support Services (18.1%) and Aerospace & Defense (16.7%).

VIS tracks the MSCI US Investable Market Industrials 25/50 Index. Though the product holds about 350 names, it is top heavy with top ten holdings accounting for more than 40% of assets.

GE is currently the top allocation with 12.3% of assets followed by United Technologies and Boeing. Like XLI, this fund too has heaviest exposure to Aerospace & Defense stocks. The fund has managed to attract about $870 million in assets so far and trades in good volume of about 50,000 shares a day.

With an expense ratio of just 14 basis points, this is one of the cheapest products in the space.

All the three ETFs have been outperforming SPY over the past three months as the outlook for the sector continues to improve.

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